Event: On August 23, 2024, the company released its 2024 semi-annual report. The company achieved operating income of 4.372 billion yuan in the first half of the year, a year-on-year decrease of 0.46%; net profit to mother of 0.662 billion yuan, a year-on-year decrease of 6.33%; after deducting non-net profit of 0.735 billion yuan, an increase of 6.31% year-on-year. Among them, the revenue of the pharmaceutical industry increased by 4.55%, and the pharmaceutical business revenue decreased by 28.08%; the decline in net profit to mother was mainly due to losses due to changes in the fair value of financial assets held by the company during the reporting period higher than the same period last year.

Sugar Network indications have entered multiple guidelines, and price reductions in collection affect sales growth. During the reporting period, Compound Danshen Dipping Pills entered the “Expert Consensus on Diabetic Retinopathy Screening Workflow and Management Standards in Community Medical Institutions (2023 Edition)” and “National Guidelines for the Diagnosis and Treatment of Diabetic Neuropathy at the Primary Level (2024 Edition)”; promoted the continued sales volume of compound Danshen drip pills; with the collection and implementation of compound salvia pills in Beijing, Shanxi and other provinces, price reduction factors also affected the growth rate of overall sales of compound salvia pills.

The R&D pipeline is progressing rapidly, and there are many innovative traditional Chinese medicine and chemical drug pipelines in the cardiovascular and cerebrovascular fields. The company runs through all aspects of prevention, treatment and rehabilitation of cardiovascular diseases. With 19 projects in the research pipeline, the company has always been in a leading position in the field of innovative cardiovascular and cerebrovascular drugs in China. In the field of heart failure, the company's innovative traditional Chinese medicine plus ginseng tablets is the first component of the traditional Chinese medicine product. It has now entered the clinical phase II phase; the indications for increasing the ejection fraction reduction and retaining ejection fraction chronic heart failure are undergoing phase II clinical trials. Heart failure with preserved ejection fraction has been enrolled in all phase II clinical trials; human umbilical cord mesenchymal stem cell injections have been approved for clinical trials. In the field of stroke, Puyouke's stroke indications have been declared for marketing; the allogeneic adipose mesenchymal stem cells project to treat subacute stroke is undergoing pre-clinical research in both China and the US, and the FDA IND declaration data has been completed; the innovative traditional Chinese medicine stroke palindrome pellets have completed all Phase II subjects.

Investment advice: Considering the impact of the price reduction in the collection price of the company's core product compound salvia, we lowered the company's profit forecast. We expect the company to achieve operating income of 8.968/9.664/10.517 billion yuan in 2024/2025/2026, an increase of 3.4%/7.8%/8.8%; achieve net profit to mother of 1.222/1.383/1.595 billion yuan, an increase of 14.1%/13.2%/15.3%; corresponding PE is 17/15/13 times, respectively, and maintained” “Cautious recommendation” rating.

Risk warning: risk of industry policy changes; risk of R&D innovation; risk of fluctuating raw materials; risk of falling product prices; risk of increased competition